Investment Appraisal: Payback Period

• Payback period is a method of investment appraisal used by businesses to determine the profitability of an investment.
• The payback period focuses on how long it takes to repay the initial investment cost.
• To calculate the payback period, the year in which payback occurs is determined, followed by calculating how far through that year payback happens.
• The formula for calculating the payback period is: outlay outstanding divided by net cash in the year of payback multiplied by 12.

The module explains how to use the payback period as a method of investment appraisal. Payback period helps businesses determine if an investment is worthwhile and compare different options. The process involves two steps: determining the year of payback and calculating how far into that year the payback occurs. The formula used is the outlay outstanding divided by the net cash in the year of payback multiplied by 12. The video provides examples of three projects and calculates their payback periods. The advantages of payback period include its simplicity and clarity, as well as its focus on when the initial investment cost is repaid. However, it does not consider profitability or returns after the payback period. This method may encourage a short-term decision-making approach.